Though housing indicators remained positive last week, there are some signs that the housing market is weakening and confidence is fading in the sector.

The National Association of Home Builders (NAHB), for instance, released its Housing Market Index (HMI) last week for October. Though the component index measuring current sales rose to its highest level all year - up one point to 68 - the index gauging expectations for the next six months went down to 67 from a remarkably strong 72 in September, while the index indicating traffic of prospective buyers dropped four points to 46.

"There has been a little bit of erosion in the expected sales and the buyer traffic," said Michael Carliner, an economist at NAHB. "It is probably premature to read too much into that, but it does indicate builders are a little bit nervous about what the future holds."

Aside from the NAHB results, the Mortgage Bankers Association (MBA) seasonally adjusted Purchase Index was down for the third consecutive week, decreasing to 341.9 from 352.5 the previous week. It is now at its lowest level in six months.

The drop in purchases is in line with expectations, said MBA chief economist Douglas Duncan. "Our view is that we will see a 4% to 5% drop next year in new and existing home sales," he said. "So there will be some slowing in 2003 but it will remain almost at the same level, though slightly less compared to 2001. [This year] has the all- time record in home sales, while 2001 was a record when it occurred."

Housing has been the leg that the economy has stood on for the last two years, but this might not be the case going forward.

In fact, the NAHB expects the value of residential investments to have a negative contribution to GDP in the third quarter of this year. Though this component of the economy surged in the first half of 2002, it has slowed somewhat. The NAHB said that GDP growth would be fairly strong in the third quarter because of robust auto sales.

Meanwhile, in the fourth quarter NAHB expects that residential investment would increase by only by 1% versus the predicted 2% growth in GDP. So, again, it won't be something that would be helping GDP growth.

"We expect that this pattern will probably continue for several more quarters," said Carliner. "But this is not because home building is weak. Home building has set a new record in terms of total value of construction in 2002 and should set a record again in 2003. But it will grow by less than other parts of the economy."

In related news, housing starts went up by 13.3% in September to a seasonally adjusted annual rate of 1.843 million units. This increase is the largest seen since 1995. This growth has been attributed to record low mortgage rates and the strength of new home sales during the summer months.

The next question, according to experts, is this: Can this persist if unemployment worsens in the coming months? Though building permits remain healthy, the numbers do not suggest that housing starts would rise above the 1.8 million range.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.